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1、FUTURE OF MERCHANDISING AND SOURCING IN A TECH WORLDCoen de Vuijst Dominik BoehlerAlexander Mol Oliver Wyman2Future of Merchandising and Sourcing in a Tech WorldINTRODUCTIONImagine a world where technology has taken over most human activity in retail management,speeding up the innovation cycle and p

2、roviding customers a fully personalized,multi-touchpoint shopping experience.It is easy to dream about the future.However,it is harder is to estimate the pace of change,distinguish between fads and trends,and make the right technology bets.That is why it is important to understand what technology co

3、uld mean for the heart of retail:merchandising and sourcing.The effective use of technology is crucial now,as macro-economic and geopolitical forces disrupt supply chains and drive inflation,with significant impact on customers budgets.As a result,the industry is faced with a mix shift towards lower

4、 priced,lower margin alternatives,challenging the overall economics of retailers.Meanwhile,service retailers face added pressure from the continued growth of discounters and rising costs in areas such as labor and energy.Technology could mitigate at least in part these risks.Our worldwide experience

5、 in consulting and developing software for retailers suggests five critical areas of focus for technology in merchandising and sourcing.Exhibit 1:Five critical areas of focus for technology in merchandising and sourcingPrioritiesWhy do this?1Further automate themerchandising levers Make better decis

6、ions Free up time and resource by automating2Bring an E2E cost view tooptimise the business Reduce business complexity and operating cost Win-win with customers by passing on savings3Look at your business througha customer lens Drive growth with profitable customers Increase loyalty4Build a high-tec

7、hinnovation function Differentiate!Offer products customers cannot getanywhere else5Leverage sourcing scaleand get more for less Best possible prices in branded Amazing product and price in OLSource:Oliver Wyman AnalysisDreaming about the future is easy.It is harder estimating the pace of change and

8、 making the right technology bets Oliver Wyman3Future of Merchandising and Sourcing in a Tech WorldDemystifying the role of AILet us clarify the role of AI.Some may have the impression that AI could soon fully automate retailers headquarters.We acknowledge that Artificial Intelligence(AI)has the pot

9、ential to revolutionize the retail industrys approach to merchandising and sourcing.However,the reality of a completely AI-driven merchandising department is still far off in the future.Instead,retailers must strive to become AI-compatible,and start applying it in select areas.We believe that retail

10、ers should prioritize incorporating structured analytics and deterministic models,as ample room for improvement still exists.In addition,structured analytics provide deeper insights into the underlying causes and drivers of decisions,which is essential for successful adoption as these decisions have

11、 significant impact on a retailers economics.Commercial directors are unlikely to rely solely on“black-box AI answers”when making critical business decisions.However,there are applications where AI offers value already now.AI offers immediate value in areas where vast amounts of unstructured data ar

12、e available,the“why”is less important,and a human filter is available to make final decisions with intuition.Examples of activities that AI excels at include identifying high-risk customers for churn,conducting a first run of product matching,or discovering innovative product ideas globally.Exhibit

13、2:Examples of structured analytics and AI use caseTopicExample structured analytics use caseExample AI use casePricing Deterministic model of price elasticity and volume switching Competitor price indices Forecasting competitor reaction to price changes More sophisticated elasticity models Product m

14、atchingPromo Deterministic model of ROI:Uplift,cannibalization,etc Supplier funding scenarios Forecasting consumer reaction to promo mechanic,timing,communication Finding novel promo ideas from around the world trawling much unstructured dataRanging Deterministic model of rande switching and optimiz

15、ation Supplier cost-price and range scenarions Creative range recommendations,which learn Finding novel product ideas from around the world,trawling much unstructured dataSourcing Analysis to get to 4-net costs Should cost models,and analyzing volume effects Broad data analysis to predict upcoming s

16、upplier cost increasesLifecyle Understanding WHY customers are churning and producing mitigation strategies Predicting customers at risk of churn Source:Oliver Wyman Analysis Oliver Wyman4Future of Merchandising and Sourcing in a Tech WorldPriority 1 FURTHER AUTOMATE THE MERCHANDISING LEVERSWith var

17、ying success,retailers are on a journey to“escape from excel-catraz”.They are adopting task and decision automation,incorporating advanced analytics,and gradually shifting towards a more autonomous system.Traditional retailers including those that have made progress in automation still have“humans i

18、n the loop”.This means that human activity is still essential to run core processes,creating a barrier to scaling and accelerating.Tech companies that moved into retail have mostly gone further,and they have humans“on the loop”.Processes are highly automated,with humans only supervising.As a result,

19、the tech players can operate faster,at lower costs,with less errors.To stay competitive,its imperative for traditional retailers to close this automation gap.Exhibit 3:Further automate the merchandising leversHuman OnlyData Supported DecisionsHuman Sign-offNo Human InvolvementNo AnalysisBackwards As

20、sesmentForward ForecastingActionable RecommendationsSource:Oliver Wyman AnalysisIn future promotion management,for example,predictive analytics generate promotions automatically in accordance with category strategy.Individualized digital leaflets delivered through the appropriate channels and at the

21、 right time integrate curated mass promotions with individualized promotions.In addition,suppliers create suggestions via APIs which are taken into consideration by the recommendation engines.The effectiveness of individual promotions and the overall program is tracked in real-time,and competitive p

22、romotion activity are monitored across all channels.While human involvement is still necessary,it takes different forms,such as explicit strategies for promotions,creative input to enhance the promotion program,and a deal structure to underpin negotiations with suppliers.Authorization rules will ens

23、ure that financial transactions exceeding a certain threshold or deviating from particular criteria must be reviewed by senior executives.Traditional retailers still have“humans in the loop”,whereas tech companies have“humans on the loop”Many tech playersMost traditional reatilers Oliver Wyman5Futur

24、e of Merchandising and Sourcing in a Tech WorldWith a substantial level of automation in place,retailers can take a holistic approach to optimize their businesses.Currently,efforts are often carried out“in silos”within the core functional areas of price,promotions,assortment,and supplier management.

25、By integrating these levers,retailers can combine insights to understand their impact on margins and on customers propensity to switch products.This knowledge can either help boost sales or the bottom line,depending on commercial priorities.Automation and analytics also improve omnichannel shopping,

26、by providing customers with a personalized experience,featuring tailored pages and shopping lists generated by predictive analytics.Technology can also help smoothen operations.For instance,smart promotions could densify delivery routes and minimize waste through dynamic price adjustments for perish

27、able goods.Online channels can also be leveraged to test products and promotions among a sample of customers,avoiding costly corrections when they are rolled out fully.In addition to these effectiveness improvements,fuller automation can deliver substantial efficiency benefits.Fewer personnel will b

28、e needed in merchandising,purchasing and support functions,with the largest reductions in category and promotions management and in sourcing processes.Staff numbers in IT and data and analytics will have to be increased to develop and maintain automation.But there could be a net reduction in headcou

29、nt of up to 60%in the merchandising and sourcing departments,according to our analysis.Priority 2 BRING AN E2E COST VIEW TO OPTIMISE THE BUSINESSIn tomorrows highly automated merchandising and sourcing world,there will be a closer connection between strategic goals and daily actions.It will be like

30、driving an autonomous vehicle you provide destination input and the vehicle will take you there efficiently.This increases the need for specific instructions.To make informed decisions,its crucial to understand cause and effect,for example,how merchandising and sourcing impact the bottom line and ca

31、sh flow.Currently,this relationship is often not well understood,as insights only go as far as gross margin(or derivatives thereof).Decision makers need to have P&L insights at the product and customer level,both aggregated and individual,accounting for all costs such as COGS,supply chain,store labo

32、r,waste,marketing,home delivery,etc.By considering volume effects and all costs,merchandisers and purchasers will have a comprehensive view of the business,allowing for better decision making in areas such as macro and micro assortment optimization,supplier negotiations,and customer acquisition and

33、retention.Automation requires more specific instructions.It is crucial therefore to understand cause and effect,for example,how decisions affect the true bottom-line,not just gross margin Oliver Wyman6Future of Merchandising and Sourcing in a Tech WorldHow to overcome barriers to sku rationalization

34、Many retailers are aware of having excessive stock keeping unit(SKUs).But they face difficulties in taking the actions necessary to eliminate those that are underperforming or unprofitable,because of a system in which category managers lack visibility and incentives and do not coordinate their effor

35、ts.The advantages of simplifying the product range can only be fully realized at large scale.However,category managers often make changes to their product ranges independently,in a sequential,reset-by-reset process.Moreover,category managers are primarily accountable for the revenue and gross margin

36、 generated in their categories,without having a clear understanding of how the number of SKUs affects the bottom line.Rationalizing SKUs effectively needs a more comprehensive approach that starts with a top-down process.First,functional teams,such as supply chain and store operations,work together

37、to determine the potential cost savings from various SKU rationalization scenarios.Next,a high-level commercial strategy provides SKU reduction targets based on direct product profitability,customer insights,and category roles.Inputs from these two processes are then brought together in the form of

38、targets for profits and SKU counts for each category.After that,the“traditional”category reset-by-reset process can proceed,while the functional teams focus on efficiencies and savings.A thorough understanding of the integral P&L and the relationship between cost drivers and costs is critical to the

39、 success of this process.Priority 3 LOOK AT YOUR BUSINESS THROUGH A CUSTOMER LENSMost retailers view their businesses primarily from a category perspective,but the customers perspective should hold equal weight.While retailers may segment their customers and offer personalized promotions,true custom

40、er centricity goes well beyond that.Retailers should prioritize the acquisition,development,and retention(ADR)of customers and determine the personalized“best action”to drive each individual customer through the ADR cycle.Today,retailers may segment their customers and offer personalized promotions,

41、true customer centricity goes well beyond that Oliver Wyman7Future of Merchandising and Sourcing in a Tech WorldWe imagine that during the weekly business reviews,category financials are decomposed into sales/margin impact of the following:New customers to the banner or category;changes in spend fro

42、m existing customers;and customers who have left the category or banner.With these insights,retailers can implement three progressive steps to improve their business.Exhibit 4:Customer Life-Time ValueAcquireNew customersDevelopCurrent customersRetainCustomers123Source:Oliver Wyman AnalysisStep 1:Int

43、egrate customer insights into core merchandising decisions.This could involve adjusting Key Value Items(KVIs)based on ADR insights,collaborating with suppliers to enhance offerings crucial for retention,optimizing assortment to account for churn risk,making ADR the primary objective of the promo pro

44、gram and limiting supplier-driven promotions.Step 2:Develop a personalized next action capability.Retailers should use individual ADR insights to optimize the customer journey.Customers at risk of leaving the brand can be offered personalized promotions or pricing,such as longer-term rebates.Loyal c

45、ustomers can be encouraged to expand their baskets.Retailers can also provide personalized reports to customers on dimensions that matter to them,such as the healthiness of their basket or the carbon footprint of their weekly groceries.Step 3:Create customers-for-life through new services.Retailers

46、can foster true,long-lasting loyalty in customers by building personal connections and adding meaningful value to their lives.For example,a food-butler app can help customers achieve personal goals in areas such as budget management,health,cooking,and sustainability.Retailers can also develop apps w

47、ith providers of sports apps and wearables,gym chains,financial services providers,chefs,kitchen equipment brands,and non-government organizations with expertise in CO2 offsetting.Oliver Wyman8Future of Merchandising and Sourcing in a Tech WorldExhibit 5:Example of butler app toolsHealthieralternati

48、vesButler app chatOriginalSaved 2,109 calories from 9,129(23%)SuggestionNormal mozzarellaCow minced meatParmigianoOlive oilNormal lasagna sheetsLight mozzarellaPork minced meatYeast flakesCoconut oilPumpkin lasagna sheetsCheaperalternativesOriginalSaved 16 from 34(48%)SuggestionGalbani mozzarellaHei

49、nz tomato pureeParmigianoOlive oilRicottaAH mozzarellaAH tomato pureeGrana PadanoRice oilCottage cheeseMoresustainablealternativesOriginalSuggestion-CustomerIm having guests over for dinner,and I dont knowwhat to cook!CustomerSounds good,can yousuggest some healthieror cheaper ingredients?Butler app

50、Why dont you try thelasagna you made lastweek that you rated5 stars?Source:Butler AppPriority 4 BUILD A HIGH-TECH INNOVATION FUNCTIONWith direct access to consumers,retailers hold a strategic advantage over fast-moving consumer goods(FMCG)companies,which have struggled to build successful direct-to-

51、consumer models.The key is a product innovation approach that blends human imagination with advanced technology to gain deeper insights into consumers behavior and their unmet needs.Retailers should first analyze behavior data to uncover gaps in their customer decision trees and identify latent need

52、s.A second step is to use AI technology to scan and make sense of large amounts of external data to discover untapped trends and innovations.Thirdly,they can leverage human creativity to enhance the insights from these data analyses.To turn these customer insights into action,retailers should invest

53、 in a robust product management process.This will define specifications and collaborate with strategic own-label suppliers for R&D support.These moves will give retailers the ability to deliver innovative products that rival those of the most innovative FMCG companies and win the battle for the cust

54、omer.In particular,full-service retailers have an opportunity to stand out from discounters,by providing customers with innovative offerings that are not found elsewhere.Oliver Wyman9Future of Merchandising and Sourcing in a Tech WorldPriority 5 LEVERAGE SOURCING SCALE,AND GET MORE FOR LESSBranded a

55、nd own-label sourcing involve distinct disciplines.Branded sourcing focuses on obtaining accurate 4net comparisons and implementing them across countries,starting internally and then within buying alliances.To leverage international scale,a solution that standardizes all relevant terms and condition

56、s into a uniform 4net framework is necessary.Advanced technologies such as fuzzy matching,look-alike modelling,and interpolation can expand the scope of comparisons and counteract international price differentiation tactics by FMCG players.Once these basics are in place and sourcing scale is fully l

57、everaged,retailers should consider moving towards collaborative sourcing.By working closely together with a select group of major suppliers and exchanging insights,costs can be reduced across the value chain and new product development can be accelerated and improved.Own label sourcing is a separate

58、 challenge.To achieve savings beyond simple volume bundling,retailers are seeking more strategic and collaborative ways to work with suppliers.Multi-year agreements with suppliers and open book arrangements bring stability and allow for structural investments in efficiency.Another key strategy is va

59、lue engineering to optimize specifications to meet consumer needs in an efficient manner,reducing costs in materials,conversion,logistics,and in-store processes.Collaboration technology is required for data exchange,sensitive data management,and joint product design and engineering.Advanced retailer

60、s are utilizing cost models based on commodity prices,labour costs,and freight,with automated feeds from external data sources,supplier data,and RFI sheets.These models allow retailers to verify and challenge supplier quotes based on underlying costs.The automotive industry offers insight into what

61、the future of sourcing in retail might look like.Car OEMs have highly sophisticated cost models and a deep understanding of their supply chain,enabling them to set prices based on should-cost analyses,enabling them to share expected prices when issuing RFQs and engage in negotiations only by excepti

62、on.Retailers should aim to build close personal connections and add meaningful value to their customers lives to create customers-for-life Oliver Wyman10Future of Merchandising and Sourcing in a Tech WorldCONCLUSIONRetailers can use technology to enhance the value and service they provide to their c

63、ustomers.A good starting point is to focus on improving the quality,speed,and efficiency of decision-making in merchandising and sourcing.To optimize the business end-to-end,it is crucial to have accurate P&L insights at a granular level.The next step is to become more customer-centric by viewing th

64、e business from the customers perspective and offering them a highly personalized experience.Furthermore,to differentiate from lower-cost competition,full-service retailers should leverage technology to support innovation and product management,improve sourcing processes,and transition to more colla

65、borative models.To do this,retailers need to make explicit choices about what technology to deploy to solve specific problems.They should be realistic about what they can do in-house versus what to buy or find partners for.Additionally,many retailers need to improve their technology and data foundat

66、ions to enable them to adopt new functionalities in an efficient manner.While the CIO understands the necessity for this,other C-suite officers might be more sceptical as the short-term business case of cleaning up legacy technology is not always evident.Therefore,we recommend developing new functio

67、nality and improving legacy tech in parallel,module-by-module.That will ensure immediate returns on investment,as the organization progresses towards its future state.Recruiting and retaining a new mix of talent will be essential to thrive in the digital age,representing a significant challenge for

68、retailers.In addition to traditional commercial talent,retailers now require more tech-savvy,near-tech,and creative talent.In conclusion,technology provides vast opportunities for retailers to better serve their customers and gain competitive advantage.Retailers who make technology a core part of th

69、eir strategy and make the right choices on technology deployment will be the winners in the future tech-driven world.Oliver Wyman is a global leader in management consulting.With offices in more than 70 cities across 30countries,Oliver Wyman combines deep industry knowledge with specialized expertis

70、e in strategy,operations,riskmanagement,and organization transformation.The firm has more than 6,000 professionals around the world who work with clients to optimize their business,improve their operations and risk profile,and accelerate their organizational performance to seize the most attractive

71、opportunities.For more information,please contact the marketing department by phone at one of the followinglocations:Americas EMEA Asia Pacific+1 212 541 8100+44 20 7333 8333+65 6510 9700 Copyright 2023 Oliver WymanAll rights reserved.This report may not be reproduced or redistributed,in whole or in

72、 part,without the written permission ofOliver Wyman and Oliver Wyman accepts no liability whatsoever for the actions of third parties in this respect.The information and opinions in this report were prepared by Oliver Wyman.This report is not investment advice and should not be relied on for such ad

73、vice or as a substitute for consultation with professional accountants,tax,legal or financial advisors.Oliver Wyman has made every effort to use reliable,up-to-date and comprehensive information and analysis,but all information is provided without warranty of any kind,express or implied.Oliver Wyman

74、 disclaims any responsibility to update the information or conclusions in this report.Oliver Wyman accepts no liability for any loss arising from any action taken or refrained from as a result of information contained in this report or any reports or sources of information referred to herein,or for

75、any consequential,special or similar damages even if advised of the possibility of such damages.The report is not an offer to buy or sell securities or a solicitation of an offer to buy or sell securities.This report may not be sold without the written consent ofOliver Wyman.Alexander MolEngagement MDominik BoehlerPAUTHORSCoen de VuijstPOliver Wyman A business of Marsh McLennan